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Jonathan Sheets

REXMY AT A GLANCE

 

 

 

 

 

 

Rexam PLC (OTC: REXMY) is the worlds largest manufacturer of aluminum beverage cans, producing about a quarter of the 230 billion cans manufactured globally in 2007,^[1][2] including 45% of total beverage cans sold in Europe and 68% of beverage cans sold in South America.^[3] Rexam helps customers develop packaging specific to their own products - for example, Rexam helped the founders of the Arizona Beverage Company develop the brightly colored, extra tall cans the company is famous for.^[4]

Rexam also produces plastic packaging for the pharmaceuticals, cosmetics, and food products - but aluminum beverage cans remain its core business, at 75% of 2007 revenues.^[5] Rexam competes with companies like Ball (BLL), Crown Cork & Seal Company (CCK), Silgan Holdings (SLGN), and Amcor (AMCR) in the packaging and container market.^[6] Contracts for metal beverage cans rarely change hands, as beverage distributors sign long-term deals with can manufacturers. Manufacturers tend to avoid one another geographically, to prevent price wars that could lower profit margins. Although this creates a steady client portfolio and revenue stream for Rexam, its earnings are influenced by external factors such as consumer preferences for packaged beverages like soft drinks and beer.^[7] Rexam's operating income is also affected by changes in the price of raw materials, specifically aluminum prices, and this is a particularly important issue in the European market, where most of Rexam's contracts do not allow the company to pass the cost of raw materials on to its customers.^[8]

Business

Rexam sells 68% of its packaging products directly to ten major customers such as Pepsico (PEP), Coca-Cola Company (KO), and Procter & Gamble Company (PG).^[9][10]

Segments

Beverage Cans

Rexam's Beverage Cans segment consists of operations in Europe, North America, South America, and Asia.^[11] Rexam is the largest manufacturer of beverage cans in Europe and South America. They produce 45% of total beverage cans sold in Europe, 68% of beverage cans sold in South America, and 22% of beverage cans sold in North America.^[12]Rexam plans to grow its Beverage Cans segment by increasing its presence in emerging markets such as South America, where Rexam's sales volumes increased 15% in 2007, and Asia, where the total market for beverage cans grew 15% in 2007.^[13] In addition to this Rexam continues to develop new specialty cans to attract new customers and maintain their current ones.^[14] As a result of this strategy, 17% of Rexam's beverage can production consisted of specialty cans in 2007 (up from 14% in 2006).^[15] The production of specialty cans helps Rexam draw in new customers and produces higher margins than the production of standard cans.^[16] Customers such as Pepsico (PEP), Coca-Cola Company (KO), and Heineken N.V. (HINKY) use Rexam's beverage cans.^[17]

Plastic Packaging

Rexam's Plastic Packaging segment produces plastic closures and containers in Europe, North America, South America, and Asia.^[18] Rexam makes plastic packaging products for the healthcare, closure, and personal care markets.^[19] Rexam's plastic health care packaging operations make drug delivery devices (asthma inhalers, etc) and prescription containers for companies such as Abbott Laboratories (ABT), Pfizer (PFE), and GlaxoSmithKline (GSK).^[20] They produce plastic closures like plastic bottle tops for companies like Coca-Cola Company (KO), Campbell Soup Company (CPB), and Pepsico (PEP).^[21] Rexam also makes products such as lipstick cases, compacts, and lotion pumps for companies in the personal care industry such as Avon Products (AVP), Colgate-Palmolive Company (CL), and L'oreal (LRLCY).^[22]

Financials

Rexam PLC Revenue and Operating Income^{[23][24][25][26][27]}(£ in Millions)

In 2007 Rexam discontinued its Glass operations.^[28] This contributed to the decrease in revenues and profits between 2006 and 2007.

Key Trends and Forces

Changes in Aluminum Prices Put Rexam's Margins at Risk, Especially in Europe

The price of Aluminum is affected by several factors including demand from other industries (transportation, construction, etc.) and aluminum manufacturing costs. Changes in the price of commodities such as Aluminum on the London Metal Exchange affect Rexam's profitability. For example, as the cost of aluminum rose from about $1600 per ton in January of 2004 to nearly $2900 per ton in December of 2006, Rexam's spending on raw materials rose from £1,348 million in 2004 to £1,845 million in 2006.^[29][30][31] Rexam protects against this risk in the United States by negotiating contracts that let them pass price increases on to the companies that buy Rexam's packaging products. In Europe however, only 50% of Rexam's European beverage can contracts let them adjust their prices when input costs change, which compresses Rexam’s margins in this market. In order to combat this, Rexam is renegotiating contracts in Europe to let them pass cost increases on to the customer.^[32]

Rexam is Heavily Exposed to a Few Key Customers

Rexam's ten best customers accounted for 58% of Rexam's sales in 2007. The loss of anyone of these customers in the future would have a significantly negative effect on Rexam's revenues. Rexam combats this risk, and tries to build customer loyalty, by customizing its operations to fit each of its clients’ specific needs. One example is Rexam's construction of a new can factory in Ludesch, Austria built to provide cans specifically for Red Bull. Another way for Rexam to retain customers is to stay abreast of technological advances and to continue to adapt its approach despite the apparent stability of its long-term contracts - an example is the firm's implementation of an online ordering system in North America.^[33]

Fluctuations in Exchange Rates Affect Rexam's Pound Sterling Revenues

Because nearly all of Rexam's non-British contracts are negotiated in the common currency of that country, changes in the value of world currencies affect Rexam's profitability. If foreign currencies depreciate, Rexam's revenues in Pounds Sterling will decrease. On the other hand, if foreign currencies appreciate, Rexam's revenues in Pounds Sterling will increase. Because Rexam does a lot business with companies based in countries that use the Euro or the U.S. Dollar, they attempt to decrease this risk by negotiating foreign currency exchange contracts that reduce their exposure to change rate fluctuations.^[34]

Changes in Consumer Demand for Beverage Items

The majority of Rexam's revenues come from manufacturing aluminum cans for beverage packaging. The demand for Rexam's beverage packaging products depends on the demand for the beer and soft drinks they hold. These shifts can be seasonal as consumers tend to demand more beverages during the hot summer months.^[35] The shifts also follow long-term trends. For example, if customers start consuming more wine and less Heineken, Rexam's sales will drop as Heineken N.V. (HINKY) orders less cans to make up for the loss in demand. On the other hand, if consumers start consuming less wine and more Heineken, Rexam's sales will increase as Heineken N.V. (HINKY) orders more cans to meet the increase in demand.^[36]

Key Competitors

Rexam competes with other packaging manufacturers and with food and beverage companies that make their own packaging such as Anheuser-Busch Companies (BUD). Rexam's biggest competitors are:

• Amcor (AMCR)-An Australian company that produces PET bottles, steel and aluminum food and beverage cans, containers for household products, and a variety of other packaging products. Amcor is a major competitor to Rexam’s international operations.^[37][38]
• Ball (BLL) -A U.S. based company that produces cans and containers for the beverage, household products, and food industries. They also manufacture satellites and other products for the aerospace industry.^[39]
• Crown Cork & Seal Company (CCK)-A U.S. based company that manufactures aluminum and steel cans for the soft drink, food, citrus, brewing, household products, and personal care industries. Crown Cork & Seal Company is one of Rexam's main US competitors.^[40][41]
• Silgan Holdings (SLGN)-A U.S. based company that manufactures aluminum and steel cans for human and pet food; plastic containers for food, consumer products, and pharmaceuticals; and vacuum closures for food and beverage products. They compete with Ball's Metal Food & Household Products Packaging and Plastic Packaging segments.^[42][43]

Rexam PLC and Key Competitors 2006^[44](U.S. $ in Millions)

Notes

1. ↑ REXMY 2007 Annual Report: Rexam at a Glance
2. ↑ REXMY 2007 Annual Report: Market and Industry Characteristics, Beverage Cans
3. ↑ REXMY 2007 Annual Report: Market and Industry Characteristics, Beverage Cans
4. ↑ REXMY 2007 Annual Report: Great Packaging
5. ↑ REXMY 2007 Annual Report: Rexam at a Glance
6. ↑ Google Finance: Related Companies
7. ↑ REXMY 2007 Annual Report: Relationships and Risks
8. ↑ REXMY 2007 Annual Report: Relationships and Risks
9. ↑ REXMY 2007 Annual Report: Relationships and Risks
10. ↑ REXMY 2007 Annual Report: Our Operations, Plastic Packaging
11. ↑ REXMY 2007 Annual Report: Our Operations, Beverage Cans
12. ↑ REXMY 2007 Annual Report: Market and Industry Characteristics, Beverage Cans
13. ↑ REXMY 2007 Annual Report: Our Operations, Beverage Cans
14. ↑ REXMY 2007 Annual Report: Our Operations, Beverage Cans
15. ↑ REXMY 2007 Annual Report: Our Operations, Beverage Cans
16. ↑ REXMY 2007 Annual Report: Our Operations, Beverage Cans
17. ↑ REXMY 2007 Annual Report: Relationships and Risks
18. ↑ REXMY 2007 Annual Report: Our Operations, Plastic Packaging
19. ↑ REXMY 2007 Annual Report: Our Operations, Plastic Packaging
20. ↑ REXMY 2007 Annual Report: Our Operations, Plastic Packaging
21. ↑ REXMY 2007 Annual Report: Our Operations, Plastic Packaging
22. ↑ REXMY 2007 Annual Report: Our Operations, Plastic Packaging
23. ↑ REXMY 2007 Annual Report: Our Operations, Plastic Packaging
24. ↑ REXMY 2007 Annual Report: Our Operations, Beverage Cans
25. ↑ REXMY 2007 Annual Report: Consolidated Financial Statements, Consolidated Income Statement
26. ↑ REXMY 2006 Annual Report: Consolidated Income Statement
27. ↑ REXMY 2002-2006 Financial History, Page 7
28. ↑ RXMY 2007 Annual Report: Chairman's Statement
29. ↑ London Metal Exchange Aluminum Price Graphs
30. ↑ REXMY 2005 Annual Report: Notes to Consolidated Financial Statements, Note 3: Operating Expensies
31. ↑ REXMY 2006 Annual Report: Notes to Consolidated Financial Statements, Note 3: Operating Expensies
32. ↑ REXMY 2007 Annual Report: Relationships and Risks
33. ↑ REXMY 2007 Annual Report: Relationships and Risks
34. ↑ REXMY 2007 Annual Report: Notes to Consolidated Financial Statements, Note 24
35. ↑ BLL 2007 10-K, Item 1: Metal Beverage Packaging, Americas, Segment, page 3
36. ↑ REXMY 2007 Annual Report: Notes to Consolidated Financial Statements, Note 24
37. ↑ Google Finance AMCR
38. ↑ AMCR 2006 20-F Item 4B: Business Overview, page 16
39. ↑ BLL 2007 10-K, Item 1: Business, page 1
40. ↑ Google Finance: CCK
41. ↑ CCK 2007 10-K
42. ↑ Google Finance: SLGN
43. ↑ SLGN 2007 10-K Item 1: Business Overview
44. ↑ All information taken from respective wikinvest pages